Aluminum industry seen by JPMorgan unprofitable on LME rule

Two-thirds of aluminum producers would be losing money because of lower premiums paid on top of exchange benchmarks if the world’s biggest metals bourse approves rules to cut waiting times at its warehouses, according to JPMorgan Chase & Co.

Premiums to obtain the metal will drop 60% to about $100 a metric ton as a result of the new rules the London Metal Exchange is expected to approve in October, Benjamin Defay, an analyst at the bank in London, wrote in a report e-mailed today. The LME proposed to oblige warehouses where waits extend for 100 days or more to let more metal out than they take in.

The premium that some U.S. buyers paid to get metal rose to a record this year even as global output outpaced demand and stockpiles approached 5.5 million tons, enough to supply North America for 10 months. Consumers led by MillerCoors LLC told a U.S. Senate hearing last month that some warehouse owners are using “unfair” LME rules to slow deliveries.

“We estimate about 75% of the industry would be loss making if premia were to fall to $100 a ton versus $250 today,” Defay wrote. “It is plausible that prices fall even further for a period as the market rebalances.”

An even bigger drop in premiums would make more than 90% of the industry unprofitable, which JPMorgan “would not completely discount,” according to the report. About 60% of the aluminum industry is losing money even with higher premiums, according to JPMorgan.

LME Proposal

The LME, which monitors more than 700 warehouses, will introduce the new rules from April 1 if they are approved by the board in October. U.S. premiums have dropped to the lowest since December, Laredo, Texas-based researcher Harbor Intelligence says. Metal premiums are added to exchange benchmarks and cover a purchase of specific quality of metal in a particular location, reflecting supply and demand on the physical market, according to Macquarie Group Ltd. in London.

Incentives offered by warehouses to attract metal plunged 87% since July, when the LME proposed new rules to speed up deliveries, according to Harbor.

Aluminum for delivery in three months fell 1.4% to $1,808.50 a ton by 3:02 p.m. on the LME. The metal used in cars and beverage has declined 13% this year, the biggest drop of the six main metals on the bourse after nickel. Prices retreated from a record $3,380.15 a ton in 2008.

Lower premiums will probably lead to “much needed supply discipline,” according to the report. Production cuts will pave the way for higher aluminum prices, Defay wrote.